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Best Bond Rally Seen Sustained in Hungary on Matolcsy Easing

Central Bank President Gyorgy Matolcsy
Central bank President Gyorgy Matolcsy, who called for “brave” use of unorthodox policies and rejected a stronger forint before assuming his role March 4, has refrained from accelerating interest rate cuts beyond a quarter point in each of the past two months. Photographer: Akos Stiller/Bloomberg

The best emerging-market bond rally has further to run as Hungary’s central bank extends interest rate cuts and limits unconventional stimulus measures, according to Pioneer Investments and Erste Sparinvest KAG.

Hungary’s local-currency bonds have returned 6.7 percent this year, the most among developing countries, according to indexes compiled by Bloomberg and the European Federation of Financial Analyst Societies. Debt from euro-region countries has returned 3 percent, the data show. The yield on Hungary’s 10-year bonds stood at 4.94 percent on May 17, one basis point from a record low and down from an average 7.98 percent in 2012.

Central bank President Gyorgy Matolcsy, who called for “brave” use of unorthodox policies and rejected a stronger forint before assuming his role March 4, has refrained from accelerating interest rate cuts beyond a quarter point in each of the past two months. Matolcsy announced a 250 billion forint ($1.1 billion) zero-interest lending plan in April to revive growth, based on a similar program by the Bank of England.

“The bank is quite cautious: they are not trying to weaken the currency, not using up too much in foreign currency reserves,” Anton Hauser, who helps manage the equivalent of $6.5 billion in assets including Hungarian bonds at Erste in Vienna, said in a May 14 interview. Erste is holding more forint bonds than their weighting in benchmark indexes, Hauser said.

Forint Rallies

The return on Hungary’s forint bonds so far this year compares with a gain of 3.3 percent for the benchmark BUX Index and a 13 percent rally in the MSCI World Index of developed countries. Local-currency debt from emerging markets has advanced 3.3 percent this year, according to JPMorgan Chase & Co.’s GBI-EM Global index.

Hungary’s currency appreciated 0.1 percent to 290.46 per euro by 4:15 p.m. in Budapest in a sixth day of gains. The forint has strengthened 4.7 percent against the euro this quarter, the best performance among the 31 most-traded currencies tracked by Bloomberg.

With inflation at a 39-year low, the Magyar Nemzeti Bank will use all methods at its disposal, including rate cuts, to help make economic growth sustainable, Matolcsy told a conference in Miskolc, eastern Hungary, on May 16.

A policy of gradual cuts, which took the base rate to a record low of 4.75 percent in April from 7 percent in July, “is working, it’s a good strategy,” he was quoted as saying by state-run MTI news service on May 17.

Rate-Cut Bets

“Further cuts in the benchmark rate can happen if the medium-term inflation outlook remains consistent with the 3 percent target and financial market trends remain favorable,” the central bank’s press office said in an e-mailed response to questions from Bloomberg, reiterating a statement from the Monetary Council on April 23.

Forward-rate agreements, derivatives used to speculate on three-month interest costs in a year’s time, traded at 3.35 percent on May 17. That’s 121 basis points below the Budapest Interbank Offered Rate, indicating as much as 1.25 percentage points in further easing from the central bank.

Morgan Stanley expects Hungary’s benchmark rate to fall to 3.5 percent by September, compared with an earlier projection that rates would bottom at 4.5 percent, Pasquale Diana, a London-based economist, wrote in an e-mailed report on May 17.

The economy expanded 0.7 percent in the first quarter from the last three months of 2012, the first quarterly growth in more than a year, the Central Statistical Office said on May 15. The inflation rate fell to 1.7 percent, the least since 1974 in April, the statistics office said the previous day.

Macro Improvement

Prime Minister Viktor Orban’s government used taxes on banks, energy and telecommunications companies to reduce the budget deficit to below the EU’s 3 percent of gross domestic product limit in 2011 and 2012 after exceeding the gap every year since Hungary joined the bloc in 2004.

“The macro picture is improving in Hungary,” Margarete Strasser, who helps manage the equivalent of about $770 million in central and eastern European debt including Hungarian bonds at Pioneer, said May 14. “On the other hand, the credibility of the country and the government has not really changed.”

Matolcsy, Orban’s former economy minister, initially undermined investors’ confidence when he began his tenure by weakening the power of his central bank deputies, helping send Hungarian credit insurance costs to a six-month high and the forint to a 14-month low in March. He is a “horror candidate” for the monetary post, Carolin Hecht, a Frankfurt-based strategist at Commerzbank AG, wrote in a note on Feb. 15.

Taking Profit

The forint dropped to a record against the euro in January 2012 as Orban sparred with the International Monetary Fund and the EU over legislation threatening the independence of the central bank. While Orban conceded to pressure on laws regarding monetary autonomy, he said last week he still opposes cutting welfare payments or pensions to meet budget goals. Hungary may raise taxes on banks or international companies, Orban told state-run MR1 radio on May 17.

Hungary’s bonds have “rallied too much,” Gyula Toth, managing director at Ithuba Capital AG in Vienna, where he helps manage the equivalent of $515 million, said in an interview on May 14. Ithuba sold its Hungarian bonds “in the last couple of weeks” to profit from the rally, Toth said.

Investors demand 304 basis points, or 3.04 percentage points, in extra yield to hold Hungary’s dollar bonds rather than U.S. Treasuries, more than double Poland’s 109 basis-point premium. Hungary’s credit-default swaps have fallen to 277 basis points from 388 at the end of March.

Yields for Hungary’s government bonds due October 2028 rose three basis points to 5.30 percent on May 17, compared with this year’s peak of 6.71 percent on March 22, data compiled by Bloomberg show. Hungarian markets were closed yesterday.

“In a normal market, I would say that most of the rate cuts have been priced in,” Strasser said. “But everybody is looking for some yield and there are not many alternatives. We could see further yield shifts downwards on the long end.”

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